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Tuesday, 1 December 2015

NIGERIA’S FIRM STAND ON FOREX: MATTERS ARISING, BY OXFORD BUSINESS GROUP

Crude is a
major player in Nigeria’s economy, accounting for two-thirds of government
revenue and more than 90% of export earnings. The fall in prices has increased
downward pressure on the naira over the last year, culminating in a 20% decline
in the currency’s value against the dollar between July 2014 and February 2015.

Despite
growing pressure to allow the naira to depreciate further, the CBN’s governor, Godwin Emefiele, has maintained a tight
monetary policy, introducing currency controls in a bid to curb demand for
foreign exchange.

All about the naira

While the
value of the naira has remained within a small band, between N198:$1 and
N199:$1 since it was last devalued in February, both local and international
investors have advocated for further movement.

“The
underlying logic of holding the exchange rate has been completely picked apart
in the last five or so months,” Alan Cameron, an economist at London-based equity
research firm, Exotix Partners, told
media in September.

The diverging
sentiment has led to a widening disparity with the country’s parallel market,
where the naira was trading at an average more than N215:$1 in August before
reaching N232:$1 in early November.

Whereas
other major oil producers, including Russia, Colombia and Kazakhstan, have
allowed their currencies to weaken, the CBN has remained resolute in its stance
to maintain the current peg, in part due to concerns over inflation, which
already stands at more than 9%.

Side effects

To stem the
outflow of foreign reserves, the CBN introduced a series of capital controls in
June, including a ban on using foreign exchange to import more than 40 items,
ranging from rice and rubber to glass. The CBN has also dipped into foreign
exchange reserves, which fell to $30.3bn in late October, down 22.4%
year-on-year, according to data from the CBN.

While the
CBN had hoped the capital controls would also help stimulate the domestic
supply chain, the measures have prompted concerns from the private sector,
particularly from firms that rely on imports.

Local
manufacturers say the ban prevents them from accessing key imported raw
materials. According to Frank Jacobs,
president of the Manufacturers’ Association of Nigeria, the sector has posted
negative growth since the start of the year, with economists predicting that
third-quarter figures will signal further declines. The controls, which have
restricted liquidity in Nigeria’s market, are also beginning to negatively
impact bond trading.

The
resulting lack of liquidity led JPMorgan
to remove Nigeria from its local currency Emerging
Markets Bond Indexes (EMBI), which are tracked by more than $200bn worth of
funds. While Nigeria will still be included in JPMorgan’s hard currency EMBI,
which is expected to limit the impact of the downgrade, the country will not be
eligible for re-entry to the local currency EMBI for at least 12 months.

In a note to
industry press in early September, Gareth
Brickman, market analyst at US-based ETM Analytics, estimated that more
than $3bn worth of Nigerian bonds may need to be sold as a result of the
downgrade.

Forecast unclear

In spite of
the impact the current monetary policy has had on the economy, the CBN, which
is independent, has received public backing from President Muhammadu Buhari’s
administration, with some caveats.

In his first
public comments on the subject, Buhari backed the CBN’s foreign exchange
policies, saying he opposes further depreciation.

Kemi Adeosun, the new minister of finance, also voiced
support for the CBN’s decision to limit foreign exchange trading. “What the CBN governor has done is brought in some breathing
space, because if we allowed the market to continue, all our reserves would
have been depleted,” she told lawmakers in mid-October.

That being
said, the government has indicated it would be willing to consider amending
aspects of the current policy.

Yemi Osinbajo, Nigeria’s vice-president, has signalled
that exceptions to some of the capital controls were up for discussion. “We are going to have negotiations with the operators of the
manufacturing sector to seek ways on how foreign exchange control can be eased
to enable the items that are not eligible for foreign exchange to be covered,” he
said in early October. (guardian)

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